Dorman on Minimum Wage

A few days ago I posted about economist Peter Dorman's views on the minimum wage and just noticed that a few days later he replied as a commenter. This is my reply to him.

Professor Dorman writes:

Mainstream empirical research does not support the view that, within US historical experience, minimum wage laws significantly reduce employment. The literature is large, and different researchers come to different opinions, but at the least, it's sure not a slam-dunk the way you guys at this blog presume.

That's certainly not the way I read the literature, although maybe our difference is over the word "significantly." I think there have been a few hundred studies by now and the vast majority do find job losses due to minimum wages.

He writes:

In any case, as far as my personal experience is concerned, there was absolutely no problem (for me or anyone else) in getting a low-end job in 1968. I literally walked into the unemployment office and walked out with a job an hour later. We've never had an unemployment rate so low. Chalk it up to (eventually unsustainable) war-Keynesian fiscal policy: Vietnam without taxes to pay for it. The one proposition I can defend without any hesitation is that, under these conditions, the minimum wage made it more possible for me to explore. In fact, I will go further and suggest that this economic environment goes a long way toward explaining the explosion of the counterculture, and that its end also dealt a decisive blow to hippiedom.

I don't doubt that he had no trouble finding a low-end job. Indeed, that was a point I made in my initial post. His obviously good brain and good writing ability put him a few cuts above the average. And notice that he chalks it up to fiscal policy, not to the minimum wage. We can disagree about fiscal policy--I think Milton Friedman won the debate with Walter Heller over the reasons for the late 1960s boom--but that doesn't matter for this discussion. So he seems to be agreeing with me that the high minimum wage was not a factor in his finding a job at the minimum wage. Which makes his statement that "the minimum wage made it more possible for me to explore" surprising. But I think he exaggerates in saying there was no problem "for anyone else" in finding a job. Indeed part of my charge was that he thought of his situation from his narrow self-interested viewpoint, not from the viewpoint of some of those less-skilled teenagers who did have trouble finding work and the employers who had to pay more.

In a follow-on comment, Peter Dorman writes:

If you want to talk about the effects of minimum wages, talk economics. Talk about search & matching models, efficiency wage models, not first year supply and demand heuristics that do not incorporate the specific features of labor markets and that play little role in labor econ at the research level. My own view, FWIW, is that micro interventions in the labor market mainly affect the position of the Beveridge curve (in sometimes tricky ways), and that positioning along the curve is a matter for macropolicy (within limits, of course).

Of course, I was talking economics. Supply and demand are part of economics. Certainly, I could have dressed it up in search and matching terms: what that does is make the situation probabilistic. So that means that a binding minimum wage will cause a marginal worker who's looking for a job to search longer. OK. I can accept that. It doesn't undercut my point. How about efficiency wages? It's true that employers sometimes, maybe often, pay efficiency wages. It's also true that if the minimum wage is above the wage the employer wanted to set, there will be some job loss. And if Peter is saying that the employer would have paid an efficiency wage above or equal to the minimum wage, then the minimum wage is not binding. And if it's not binding, it had no effect on what he was paid as a young man.

Peter adds:

What is really strange is that the topic of this thread is supposed to be freedom. I challenged the libertarian assumption that only noncoercion qualifies as freedom, and as a minor footnote mentioned an experience I attributed to minimum wage laws. You guys have focused all your attention on this one detail, and no one has provided a coherent defense of the view that noncoercion is the only, or at least the dominant, criterion. What's up?

Fair question. I stated in my initial post my view that Hedengren et al had the right view of freedom. I'm not sure what more I would say about that. What I found striking was that Peter admitted that the minimum wage required coercion and that he made the case for the minimum wage based entirely on what it did for him and people like him without considering the losses to others. That's what I chose to address because that's what I found interesting.

Comments and Sharing

Meanwhile, in South Africa:
http://www.nytimes.com/2010/09/27/world/africa/27safrica.html?scp=2&sq=south%20africa&st=cse
Freedom at work, I guess.

Dorman clearly understands that a sufficiently high minimum wage will reduce employment. His only argument is that the MW can be set at such a level that the slight decrease in employment will be offset by the benefits to those who can get jobs. Even proving that such a level exists would be insufficient, as he'd then have to demonstrate some mechanism to set the MW at the optimal level, as opposed to the actual mechanism of economically ignorant politicians raising it by some arbitrary percentage at arbitrary intervals.

But hey, he could always get a job in the 60's which allowed him to be a hippie, so I guess everything's cool.

Slightly, but not completely off topic: what's definition of coercion? According to The American Heritage Dictionary of the English Language, I've found on Internet:

coerce:

1. To force to act or think in a certain way by use of pressure, threats, or intimidation; compel. 2. To dominate, restrain, or control forcibly: coerced the strikers into compliance. 3. To bring about by force or threat: efforts to coerce agreement.

If that is adequate definition, then property is form of coercion. I'm walking on the beach, and look - someone forces me to leave the beach. He threats, intimidate me. Definition doesn't say anything about whether force is justified. Am I right? If not, please, what is definition you use, and source - it is critical element.

Regarding the empirical research - the theory more or less says: if you set minimum wage, it will either not have an effect or cause unemployment.

Now there is a third option: it will be ignored. Which is what actually happens quite a lot. About half a year ago on some blog there was a link to an article where some government body did a research on how the work law is obeyed in the low-income group. Guess what? IT IS NOT. Overtime is one of many ways to ignore the minimum wage.

So - the state sets minimum wage. The employer asks the marginal worker to do overtime or be fired. The employee consents to the overtime. A statistician measures employment and concludes: no effect of minimum wage on employment. No effect on wage rate either...

I've never understood how people can seriously use efficiency wages to argue for a high minimum wage. Just because paying people more under some circumstances can increase their productivity enough to pay for the wage bump doesn't mean that this is true under all circumstances. Taken on its own terms, an efficiency wage is not just some magic formula whereby paying people more increases their productivity. For instance, it's not usually understood as an income effect (e.g., workers can afford good transportation and daycare which reduces absenteeism). Rather the theory of an efficiency wage is that it makes the particular job attractive relative to the other options and either the employee is grateful for the high wage (what Akerlof calls a gift exchange of excess effort for excess wage) or is simply terrified of getting fired from such a great paying job. This is important because if you think about efficiency wages as a "relative to other options" thing rather than an "income effect" thing, a high minimum wage will compress the wage distribution and therefore reduce any efficiency wage effects from the status quo ante.

For instance, if Costco and WalMart are in the same labor market but Costco pays $12 and WalMart pays $6, then Costco can reasonably expect more motivated employees as they'd realize how lucky they are to be at Costco. However if a living wage law raises the minimum wage all the way to $12, there's no longer a relative advantage to being at Costco. If you think efficiency wage is about income effects then this change should increase productivity at WalMart, but if you think it's about relative to the competition (as is the dominant model in the theoretical gift exchange literature) then this change should decrease productivity at Costco.

OT:
If Edmund Phelps is right that everyone working is overpaid, leaving insufficient money to reach 100% employment and thus producing some level of very persistent unemployment.

Wouldn't it then be logical that in a period of a sharp decline in the inflation rate, people with jobs would tend to be even more overpaid, leaving even less money available to increase hiring and producing a high level of unemployment like we have today.

One response to this could be for the unemployed to accept very low wages much below their productivity level. Minimum wage might stand in the way of this, better an hourly wage subsidy.

That's been my experience as well. Those who favor the minimum wage tend to be people who dont put a lot of thought into what the minimum wage does to people who dont look like them. The marginal worker. The minority. The high school dropout. Etc.

Having read Dorman's rebuttal to Hedengren et al, it seems clear he believes that government doesn't create anything, it merely shifts stuff around. That's a major leap forward. I wish more minimum wage proponents were that principled in their arguments.

And: maybe another way of putting the coercion argument is that positive liberty for one person is another person's coercion. Price floors coerce us all into paying more for things while "enabl[ing][certain] individuals to make the choices they prefer."

If you want to talk about the effects of minimum wages, talk economics. Talk about search & matching models, efficiency wage models, not first year supply and demand heuristics that do not incorporate the specific features of labor markets and that play little role in labor econ at the research level. My own view, FWIW, is that micro interventions in the labor market mainly affect the position of the Beveridge curve (in sometimes tricky ways), and that positioning along the curve is a matter for macropolicy (within limits, of course).

He might as well come out and say "Why don't we introduce as much obfuscation about this issue as possible so I can justify my preconceived notion that a minimum wage is a good thing". The idea that you aren't "talking economics" unless you incorporate these convoluted aspects is nonsense, and is an example of academics attempting to create barriers to entry on who can and cannot authoritatively comment on economic issues.

Supply & Demand is taught in the first year because it's A) useful and B) true. Criticizing an economic argument based mainly in S&D is like criticizing a mathematical proof that relies heavily on addition and subtraction.

The Law of Demand is ironclad and unyielding. Price up, quantity down. Labor is not special.

Congratulations to the NY Times for reporting some facts about the minimum wage. The title of the 9/26 story is descriptive, "Wage Laws Squeeze South Africa’s Poor." Remember, this is the NYT. The story leads with:

"NEWCASTLE, South Africa — The sheriff arrived at the factory here to shut it down, part of a national enforcement drive against clothing manufacturers who violate the minimum wage. But women working on the factory floor — the supposed beneficiaries of the crackdown — clambered atop cutting tables and ironing boards to raise anguished cries against it.."

It's a vivid portrait of how elites and their ideology destroys lives, futures, and liberty.

If you are going to do non-experimental empirical work your basic framework is to have competing hypotheses H1, H2,... Work out what they imply for the real world. Have a look. Work back to find the subset of hypotheses that still seem credible. Notice the catch. They had better have some credibility before you start.

The usual approach seems to be to play off two hypotheses

H1 = Politicians are mad scientists who vary the minimum wage at random, but there isn't a causal link running from raising the minimum wage to reduced employment.

H2 = Politicians are mad scientists who vary the minimum wage at random, and there is a causal link running from raising the minimum wage to reduced employment.

I'm not impressed by this kind of research because I don't buy the "politicians are mad scientists" hypothesis.

I go for

H3 = Politicians are cunning buggers. They know that there is a causal connection from raising the minimum wage to reduced employment, but they also know that the lower orders love the "something for nothing" appeal of raising the minimum wage. So the politicians bide their time waiting till they can see an economic boom coming bringing wage rises in its wake. Then they try to time the raising the minimum wage to gain maximum kudos with the voters for things that would have happened anyway.

H4 = Like H3 but politicians have a less shrewd judgment of the bottom end of the labour market.

The implication of H3 is that rising minimum wages go with rising employment. The implication of H4 is that rising minimum wages go with falling employment. If you do naive empirical work on the connection between minimum wage laws and employment you will get me to update my posterior distribution over the shrewdness of politicians.

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